Inside the Klarna/Modo deal: how to deliver fast and flexible payments

As the open banking initiative facilitates a monumental shift, new market participants are looking to disrupt in entirely new ways.

While the US and European payments landscape is awash with sexy consumer-facing paytech, few of those participants are paying attention to the vital work of the underlying plumbing – the critical key to any long-term success in the industry.

Having recently received an equity stake from Deutsche Bank, Modo fits the payments plumbing bill.

PaymentEye reached out to Modo, specialists in payment system interoperability, about their recent partnership with Klarna, the e-merchant platform.

PaymentEye sat down with Francesco Passone, director of global solutions at Klarna and Brian Billingsley, chief revenue officer at Modo payments, to talk about the long-term ambition of the partnership as well as how they saw the industry shaping up for 2019.

Particularly in the US, what are the current pain points trying marry numerous payments systems?

Modo: For banks, especially on the corporate side, they are being asked by their business clients to add new methods of payment for the bank’s customers consumers to receive funds (insurance payout for example). When these payment methods are international, it becomes more complex with FX and KYC issues.

Modo enables the bank to execute on current strategies while future-proofing their technical investment. When the next coolest wallet is created and scales quickly in three years, the bank can add it as an endpoint in a matter of weeks instead of changing their whole roadmap.

From a merchant perspective, there are great payment methods like Klarna that offer consumers more spending power and offer a great checkout experience, but the backend integration is real work. Modo enables merchants to turn on payment methods like Klarna in a much faster way.

What does fast and flexible payments connection look like to you? Why is fast and flexible important for an eCommerce company?

Klarna: The payments space is evolving at the speed of light and it is of paramount important for eCommerce merchants (but also for more traditional brick-and-mortar stores) to quickly adapt to new trends in their existing markets as well as to launch new geographies with the relevant set of payment solutions for a specific market. Having a localised payment strategy is key to deliver a good customer experience and maximise conversion. A flexible payment connection should allow merchants to perform the above at a fast pace and with the minimum implementation effort. To keep the pace of the market trends, these cycles would need to become faster and faster targeting days, rather than not weeks or months.

What sort of partnership is this?

Klarna: It is a long-lasting partnership that has it roots in the way that we jointly solved some technical challenges to come up with a proposition to offer an easier way to integrate Klarna’s products and services. Starting as a technical enabler few years back, Modo has become is a trusted partner in a broader sense. Our teams have continuous and open conversations on multiple levels, may those be new ideas or lessons learned on the field when interacting with merchants.

Modo: Klarna and Modo have a truly symbiotic relationship. Klarna leverages Modo’s interoperability platform for faster speed-to-market benefits. Modo powers important technical payments connections allowing Klarna to focus on the amazing customer experience and building out the next-gen global bank. Modo is bank grade security cloud based infrastructure for payments data – Klarna is a great consumer brand and the smoooth way-to-pay.

How exactly are you using Modo?

Klarna: We leverage Modo’s capabilities in terms of interoperability and “plumbing” to offer our merchants world-wide a faster way to integrate our products and services. By resolving quite some complexity “behind the scenes”, Modo helps us reducing the friction of a lengthy and complicated technical integration whenever possible. Releasing merchants from this burden is a huge value add for them as integrating payment solutions isn’t “sexy” and ultimately you would like to do it once and be future proof.

What exactly is a digital payments hub and why is there an appetite for such a product?

Modo: A digital payments hub could mean many things to many people – but for Modo a digital payments hub means that we enable our customers to connect to many various processors, acquirers, and alternative payment methods with one technical integration to Modo, and not have to build out separate integrations and workflows for each payments partner. As Modo is pure technology, we give our partners a cost-effective utility that allows them to plug into any payment system they need to and focus on their core business.

What especially stands out about the company?

Klarna: People. They have an “A Team” of brilliant, tech-savvy and business-minded professionals who deeply understand the space they operate. Their unique expertise and ability to be at the forefront of the technology makes them a rare breed in the payments ecosystem. In addition, I am truly amazed by the flexibility of the COIN technology and how it can be applied in many different areas creating unique propositions for the different actors in the industry, may those be partners or merchants.

What is an industry standard transaction exception rate and how does Modo achieve this?

Modo: Modo’s overall exception rate is lower than 0.05% lifetime to date, and is trending down very quickly. We accomplish this by breaking down any payments type into a simple single data structure (a canonical form) controlled by a series of state machines that gives our partners a real-time look down to the individual transaction level across all ledgers in the transaction. This enables us to automate a large % of issues in payments.

What trends are we seeing in the payment landscape in the latter half of 2018?

Modo: Instant payments in Europe. The effort made to create a pan-European real-time scheme from a very fragmented payment ecosystem has been remarkable. Now that more and more banks are rolling out these services, this is really impacting daily of hundreds of millions of European citizens, which is fantastic to observe.

Klarna: Banks are seeing more of a need to connect to fintech players/competitors like Klarna, PayPal, AliPay, etc. FANGS and other global companies have much higher demands from their corporate banking providers when it comes to payment and disbursement options for their customers. Consumers expect to be able to initiate a payment and have the recipient just receive the funds. Real-time payments is gaining traction from a US perspective.

Fintech still needs to do more to better serve the 8m UK consumers struggling with the emergence of a cashless society, despite the recent success of the fintech boom according to a survey and some market participants.

A senior payment professional has revealed that Open Banking, GDPR and 3D Secure 2.0 dominate client conversations while Strong Customer Authentication (SCA) is not a priority despite the deadline for compliance fast approaching.

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A senior payment professional has revealed that Open Banking, GDPR and 3D Secure 2.0 dominate client conversations while Strong Customer Authentication (SCA) is not a priority despite the deadline for compliance fast approaching.